Guest Post by Michael Frazis.\r\nPeople can be relied on to disagree in two areas: politics and prices. In these two fields lies the most foolish behaviour of humankind.\r\n\r\nThe year 2017 may have been the year of turning real money into fake money. But it\u2019s 2018 now, and the cryptocurrency market is unlikely to increase another thirty-three times this year \u2013 though that would be a sight indeed!\r\n\r\n\r\n\r\nThis is a historic period in financial markets that will be written about for centuries.\r\n\r\nThe seven or so hundred billion dollars of crypto-value simply didn\u2019t exist a few years ago. It\u2019s all now in the hands of techno-enthusiasts, who are pouring it into new coins.\r\n\r\nAttention is the true currency here, and coins that can build and maintain attention, no matter how ridiculous, are attracting enormous valuations. Holders of Dogecoin and Useless Ethereum Tokens will know what I\u2019m talking about.\r\n\r\nBuying and holding crypto still expose you to a rat\u2019s nest of hackers, thieves, and criminal states. Exchanges have matured dramatically from the days of Mt Gox, and are less likely to take a look at their customer\u2019s bitcoin and run off with it. They\u2019re simply too profitable as honest businesses.\r\n\r\nBut given the increased sums, the stakes and temptations are higher. There are no guarantees and no chargebacks in this new world.\r\n\r\nMeanwhile, the protocols are maturing. The rules are becoming clearer and even after a manic 2017, the real game has barely started: where people build game-changing businesses.\r\n\r\nCrypto feels like the app store after the first or second iPhone. We all know that it will be big, with world-changing applications, but the damn things are just too slow right now.\r\n\r\nA simple Cryptokitties app, where kitties breed and are bought and sold as collector\u2019s items, reduced the Ethereum network to a crawl.\r\n\r\nEventually, the networks will speed up, and there are thoughtful entrepreneurs watching, studying and learning.\r\n\r\n\r\nA breedable cryptokitty, reminiscent of the Tamagotchi craze. $20 million has been spent on these \u2013 child\u2019s play relative to the >US$100b global games market.\r\nThe conversations around tables in Asia, Africa, Europe and the Americas are rarely about apps.\r\n\r\nInstead, the question on everyone\u2019s lips is that never-ending riddle: where are prices going?\r\n\r\nSeven hundred billion sounds large (editor note: prices have fallen ~$100 billion since this was written), but this is about equal to a leading US tech company. But given the amount of attention on the space, this order of magnitude actually seems about right.\r\n\r\nThe crypto market capitalisation is still small for an industry, and very small for an asset class.\r\n\r\nEven in such a strange world, the usual clues of supply and demand are faithful friends, whom even crypto markets in the grip of the global zeitgeist must eventually obey.\r\n\r\nWhen the tides of speculation recede, what demand will be left? And what supply?\r\n\r\nWhat will happen when the cryptopreneurs try to turn their paper wealth into real money?\r\n\r\nOne approach would be to find use cases that are dramatically improved with crypto, that should maintain demand irrespective of which direction the animal spirits rush.\r\n\r\nAs a first run, here are five. And, they are enormous markets:\r\n\r\n \tCriminals\r\n \tCitizens in sketchy states\r\n \tIndeed, criminal states\r\n \tVenture capital\r\n \tA redesign of the entire app ecosystem.\r\n\r\nMake a judgement call on each of these, and you can figure out whether the current $700 billion sounds high or low.\r\nCriminals\r\nBlockchain has triggered the world\u2019s greatest crimewave. There are simply very few ways to steal tens or hundreds of millions of dollars (perhaps politics aside!)\r\n\r\nIf you were \u2018hacked\u2019 in 2008 it probably meant someone mucked around with your emails, and, depending on your personal tastes, caused mild to excruciating embarrassment.\r\n\r\nNow, with such widespread crypto speculation, many home computers hold serious amounts of cryptocurrency.\r\n\r\nI like to think there were people in the various global mafia suggesting years ago that money be laundered through crypto, have since been showered with the glory of filthy lucre.\r\n\r\nIn crime, as in business, the computer geeks are probably on top.\r\n\r\nEven the criminal complex shows the democratising nature of crypto.\r\n\r\nThe mafia syndicates can be beaten at their own game by crypto-enthusiasts selling illicit drugs to anyone in the world, and efficiently laundering the proceeds, all based on anonymous but trusty reputation metrics.\r\n\r\n\r\nThe Silk Road, before the Dread Pirate Roberts, the founder, was arrested. Great story actually. There are now plenty of copycats.\r\nSome might say that you\u2019re safer dealing with an online dealer on approval ratings than a street hustler. But whether or not you agree, it\u2019s unarguable that this was an early driver of crypto demand.\r\n\r\nBe aware that bitcoin is pseudonymous, and transactions can be tracked. That is, after all, the whole point of a blockchain!\r\n\r\nThere are new coins, like Monero, that play specifically to the criminal use case. Worthy of note for a speculator.\r\nCitizens in Sketchy States\r\nFrom Sydney, where I\u2019m currently writing, it\u2019s hard to imagine money in a bank account vanishing.\r\n\r\nBut it happens all the time, even in Europe. Ask the Cypriots. Venezuelans, Argentinians, various African countries. All have effective state theft in living memory.\r\n\r\nPerhaps it\u2019s more terrifying to live in a state where the rule of law is strong, but enforcement is political.\r\n\r\nSelective \u2018corruption\u2019 purges in Russia, China and Saudi Arabia put everyone at risk. Even those at the top can never be safe from their successors.\r\n\r\nI doubt any of those accused would have completely escaped the net with crypto, but they would have been able to stash away significant amounts of value for their families.\r\n\r\nThere are pensive viewers, watching, nurturing their fortunes and thinking about their families, all around the world.\r\nCriminal States Themselves\r\nNorth Korea can now convert electricity into serious amounts of globally usable currency, as can any other intelligence organisation that cares to secretly fund nefarious actors.\r\n\r\nForget sanctions, now electricity equals global spending power.\r\n\r\nThis is not exactly a small market. No matter what the bitcoin price does, you can be sure that the transaction value undertaken by these organisations will remain significant, and increase as the intrinsic advantages of crypto become more and more apparent.\r\n\r\nI wonder if the North Korean threat was behind South Korea\u2019s recent banning of cryptocurrency.\r\n\r\nIt seems they\u2019re behind a lot of the hacks.\r\nVenture Capital\r\nFinally, on to something more positive!\r\n\r\nKickstarter \u2013 founded in the same year as bitcoin \u2013 revolutionised the new ventures, allowing people to sell their products before they were built, and use the actual proceeds to build them.\r\n\r\nIncredibly democratising, and you have to be quite sour to find a downside. Perhaps US$2 billion has been funnelled through Kickstarter to new businesses.\r\n\r\nBut Kickstarter and its peers have drawbacks. Founders can\u2019t offer real upside to their early backers, and buyers can\u2019t trade their claims.\r\n\r\nMost importantly, Kickstarter determines access and sets the rules.\r\n\r\nEnter ICOs, Initial Coin Offerings, where users deposit bitcoin or Ethereum (usually) and receive a new coin.\r\n\r\nThose running ICOs can set the rules. They can reward early backers however they like, and punters are free to trade their claims at any time.\r\n\r\nThis was simply not possible before.\r\n\r\nKickstarter\u2019s sweet spot is in small products: bags, fashion items, films and games.\r\n\r\nFor more mature companies, that need tens or hundreds of millions, the game has completely changed, for the better.\r\n\r\nPreviously venture capital tended to flow to founders at famous universities in very small corners of the world.\r\n\r\nFor those putting in money, the investments are highly illiquid, and capital is locked up for up to a decade, or more. Successful investments are very slowly realised.\r\n\r\nThis is bad, as realised profits are typically recycled into the next round of startups, and it\u2019s those early stages where capital can be so beneficial to the enterprise\u2019s success, and their ability to hire and boost the economy.\r\n\r\nCompared to crypto: funding can and does come from all over the world, in tens or hundreds of millions of dollars. The investments are immediately tradable, and open to everyone.\r\n\r\nMany of us were effectively addicted to Airbnb and Uber years ago, but despite our conviction in the success of those companies, we never had the opportunity to invest.\r\n\r\nIn the future crypto world, that won\u2019t be the case.\r\n\r\nAnd, in fact, companies like Airbnb and Uber could be very effectively disrupted by the power of crypto.\r\nWhich Brings Us to Apps\r\nMost situations involving private information that needs to be selectively verified, should probably be on a blockchain.\r\n\r\nMedical records, criminal records, university transcripts \u2026 even now sexual consent.\r\n\r\nThese all have something in common: critical information that needs to be both private, and verifiably true in particular situations.\r\n\r\nBut the real power of crypto is the way it can provide value to early users.\r\n\r\nPayPal famously gave $10 to every new user. A very straightforward approach to customer acquisition!\r\n\r\nUber gave away free vouchers, and many startups try to find ways to do the same.\r\n\r\nThis is simply incomparable to the flexibility of crypto.\r\n\r\nNow, early users of an app can accumulate, from a fixed supply, currency that can be used in that app.\r\n\r\nIf the app takes off, the restriction on supply ensures rich rewards for every early backer, not to mention the founders.\r\n\r\nIn fact, this is enough to compensate in its own right.\r\n\r\nUber currently charges 25%. Why doesn\u2019t someone set an equivalent app where the driver keeps 99% of the value?\r\n\r\nThe founders can build the product off transaction fees, and the currency they set aside for themselves in the ICO. There are many apps that can be disrupted in similar ways.\r\n\r\nRatings systems revolutionised the internet. They drove Amazon\u2019s success, and allowed the efficient success of anonymous websites stocked entirely with criminals (and the odd FBI agent).\r\n\r\nCrypto could allow a verifiable identity that builds \u2018trust\u2019. As you go through your day, transacting honestly, hiring car rides, bicycles, rooms and so on, you could build up reputation in a completely verifiable way.\r\n\r\nThis alone is extremely valuable. Think of the value of Alibaba and friend\u2019s credit rating system in China.\r\n\r\nThe point is that you, the user, can selectively decrypt your identity and verification. Unlike a pre-crypto attempt at this, no one can see it unless you unlock it, and because it\u2019s on the blockchain that everyone can see and verify for themselves, you can guarantee it\u2019s you.\r\nOk, But What About Supply?\r\nI\u2019ve kept quiet on this, mostly as I got this part of the equation wrong in 2017. I thought that a wave of ICO supply would suck the capital out of the market.\r\n\r\nHaving studied the tech boom of the 1990s, it\u2019s striking how the peak of IPOs, the equity market equivalent of ICOs, sucked out cash from the market right at the top. Investors sold shares and put the cash in new firms, where it was taken and spent by the founders. Perhaps causing the fall in prices, which lead to further selling.\r\n\r\nThe same dynamic seemed to be building in ICOs.\r\n\r\nI made a mistake, however. It turns out that, in the short and mid-term, ICOs actually increase demand for crypto.\r\n\r\nYou need to deposit bitcoin or Ethereum, so if you see an ICO you like, you\u2019ll have to pay up. The issuer of the new coin generally holds the bitcoin\/Ethereum for quite some time, thus locking up that supply.\r\n\r\nThis is very different to the stock market, where a hyped company can create and sell stock in themselves to create cash.\r\n\r\nThis also gives a mechanism as to how many of these coins may finally come undone.\r\n\r\nPlease have no illusions \u2013 I love the space, but in my honest opinion, the vast majority of ICOs, are going to zero.\r\n\r\nThis isn\u2019t a profound statement \u2013 most business, go to zero.\r\n\r\nRemember that while the supply of each coin is highly restricted, the market is not.\r\n\r\nPeople are building supply restrictions \u2013 with the intention of maintaining price increases \u2013 Into the functioning of their coins.\r\n\r\nPersonally, I wish people would worry less about making their coins go up in value, and more about building businesses that really take advantage of the power of crypto.\r\n\r\nThe amount of money that can be made in business puts even the riches available in crypto to shame.\r\n\r\nSo how can a cryptocurrency be worth anything at all? If there was a blow up, what would it look like and what should you do? Isn\u2019t the whole thing a massive waste of electricity? And where should you actually invest? Subscribe below for Part II.\r\n\r\nAbout the Author\r\n\r\nMichael Frazis is the founder of Frazis Capital Partners, a boutique global investment fund. He owns small amounts of cryptocurrency personally. If you\u2019d like to keep up to date with his ramblings and investment tips you can subscribe to his email newsletter here or follow him on his blog.\u00a0\r\nSubscribe\r\nDisclaimer: The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. 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